US Stocks Brace For Another Day In The Red As Rally Loses Steam: Analyst Sees Market Pullback On This Indicator

U.S. stocks are poised for another day of weakness, although some positive tech earnings may provide a modest lift to the sector. The market appears to be digesting information following a rally that began after the early January downturn. According to a recent report from FactSet, estimated earnings growth for S&P 500 companies has turned upward as more companies report earnings beats by a wide margin. Additionally, speeches from Federal Reserve officials scheduled for the day could influence trading.

Cues From Monday's Trading:

Major indices paused on Monday due to concerns about overbought levels, prompting caution among investors. Federal Reserve commentary suggested that the central bank may refrain from cutting rates until evidence of a sustained downtrend in inflation emerges.

The Institute of Supply Management’s service sector reading added to concerns about delayed rate cuts from the Fed. The survey showed “economy growing solidly in early 2024 and prices rising, further reducing odds of a March rate cut,” said Comerica Chief Economist Bill Adams.

Indices opened lower and extended losses in early trading before rebounding from lows later in the morning. However, they still ended the day down, with both the S&P 500 Index and the Dow Industrials retreating from record levels.

All sectors, except healthcare stocks, experienced declines, with material, utility, and real estate stocks particularly affected by the sell-off.

US Index Performance On Monday

Analyst Color:

The high-flying S&P 500 Index could see some slowdown, according to LPL Financial Chief Technical Strategist Adam Turnquist. “The S&P 500 is now riding a four-week winning streak — making it an impressive 13 out of 14 positive weeks — and has gained more than 20% since the October 2023 lows,” the analyst said.

“While markets can remain overbought for extended periods, especially in strong bull markets, extremes in momentum often portend price pullbacks or consolidation phases.”

He noted that the index has recently climbed to over 10% above its 200-day simple moving average, raising the odds for potential reversion to its mean. Also, the market breadth has not improved despite the S&P 500’s rally, the analyst said, adding that declining shares modestly outpaced advancers last month and there were fewer S&P 500 stocks making new 52-week highs in January than in December.

“This negative divergence, defined by the S&P 500 moving higher as breadth metrics move lower, further raises the odds of a potential pullback or consolidation phase for stocks,” Turnquist said.

“In terms of potential entry points, the next key downside support levels for the S&P 500 set up near 4,830, 4,800, and 4,726.”

Futures Today

Futures Performance On Tuesday

In premarket trading on Tuesday, the SPDR S&P 500 ETF Trust SPY edged down 0.02% to $492.39 and the Invesco QQQ ETF QQQ gained 0.02% to $428.52, according to Benzinga Pro data.

Upcoming Economic Data:

A slew of Fed officials are scheduled to speak on Tuesday, including

• Cleveland Fed President Loretta Mester: 12 p.m. ET
• Minneapolis Fed President Neel Kashkari: 1 p.m. ET
• Boston Fed President: Susan Collins: 2 p.m.
• Philadelphia Fed President: Patrick Harker: 7 p.m. ET

The Treasury will auction three-year notes at 1 p.m. ET.

See also: Futures Vs. Options

Stocks In Focus:

• Rambus Inc. RMBS fell over 10% in premarket trading following its quarterly earnings announcement.
• Palantir Technologies, Inc. PLTR jumped about 17% after the company reported its fourth straight quarterly profit and also offered positive commentary regarding its AI platform.
• J&J Snack Foods Corp. JJSF slumped over 7% on earnings.
• Check Point Software Technologies Ltd. CHKP, DuPont de Nemours, Inc. DD, Eli Lilly and Company LLY, GE HealthCare Technologies Inc. GEHC, Hertz Global Holdings, Inc. HTZ and Spotify Technology SA SPOT are among the companies due to release their quarterly results before the market open.
• Those reporting after the close include Amgen, Inc. AMGN, Chipotle Mexican Grill, Inc. CMG, Edwards Lifesciences Corp. EW, Ford Motor Co. F, Cirrus Logic, Inc. CRUS, H&R Block, Inc. HRB, The Western Union Company WU, Yum China Holdings, Inc. YUMC and MicroStrategy Incorporated MSTR.

Commodities, Bonds, Other Global Equity Markets:

Crude oil futures rose 0.59% to $73.21 in early European session on Tuesday, building on the modest gain they made in the previous session. The benchmark 10-year Treasury note edged down 0.006 percentage points to 4.158% on Tuesday.

In Asia, Chinese and Hong Kong equities rallied amid reports that authorities are contemplating measures to stem the stock market slide. On the other hand, the Australian market fell moderately after the nation’s central bank kept rates unchanged. Japanese, South Korean and Singaporean markets also retreated.

Sentiment in Europe was mixed by late-morning trading on Tuesday.

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